What does it mean and should you buy it? 

Parametric Insurance is now available to cannabis and hemp companies through Cannasure Insurance Services.  The first question one should ask themselves is what is “Parametric Insurance.”  According to the National Association of Insurance Commissioners:

The term parametric insurance describes a type of insurance contract that insures a policyholder against the occurrence of a specific event by paying a set amount based on the magnitude of the event, as opposed to the magnitude of the losses in a traditional indemnity policy.

The key terms to help understand the meaning are “specific event,” “set amount,” and “magnitude of the event.”  The specific events according to  Cannasure are likely to be Hail, Drought, Excess Rain, Wildfire, Frost, Wind, Tornado, and Cyclones.  Once the threshold or “magnitude” is breached by the specific event, then the insured (“policy holder”) will have a loss or claim.  The terms and conditions will be spelled out within the insurance policy.  

Here’s an example of how a claim may be analyzed and paid to a cultivator.  A Oklahoma grower insures their crop for $1,000,000 (“set amount”).  The data indicates the location has a history of tornadoes (“specific event”).  The insurance policy determines a threshold before a payment will be made is EF-3.  If a EF-4 or EF-5 (“magnitude”) tornado which exceed an EF-3 were to destroy the crop, then the cultivator is eligible for coverage.  As you can determine from this hypothetical example, the parameters have been stated and triggered for coverage to be paid. 

Potential Advantages for Cannabis and Hemp Parametric Insurance

• Coverage availability.  Particularly important to satisfy contractual obligations such as lenders and investors
• Simplified underwriting process.
• Payment of claims is less likely to be held up in contractual disputes.  The cannasure program indicates payments could be made in as little as three days.  This is a significance difference with traditional insurance polices as claims can take months.  
• Because a threshold must be met, the cultivator will have an incentive to take necessary precautions to protect their plants such as sensors and warning systems.  
• High coverage limits are available up to $100M.
• This coverage can coincide with other traditional insurance contracts to replace certain gaps in coverage that may exist. 
• Available for medical cannabis and hemp growers.

Potential Disadvantages for Cannabis and Hemp Parametric Insurance

• You may experience damage and receive no payment from the insurance carrier because a parameter was not breached.  Using the example from above, a EF-3 Tornado may cause damage to your field.  This is below the contractual threshold for meeting a EF-4 and EF-5.  
• Minimum annual premium is $15,000.  This program is likely designed for larger outdoor operations with substantial risk. 
• Not currently available for recreational cannabis growers.

Parametric crop insurance can help reduce risk particularly knowing certain weather events would have catastrophic consequences.  It is important for cultivators to understand their exposures meaning events that would cause damage, thresholds and finer details of the insurance policy before procuring the insurance.